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While a large percentage of remittances are sent through informal channels, formalization of remittance transfers makes the process more secure and easily monitored and allows these funds to be directed toward savings. Reducing the cost of transfers encourages the use of more formalized systems while formalizing remittance transfers can help allow unbanked remittance clients to access other financial products.

Studies show that security, ease, timeliness, geographic accessibility, payout options, and price of transaction are the main factors when remittance senders choose a transfer service. Developing a secure, affordable, accessible, timely, flexible, and innovative transfer service is thus important in establishing a meaningful rapport between FIs and the remittance clients they serve.

Given that the vast majority of remittance clients remain unbanked, remittance transfer services allow banks to reach out to remittance clients and entice them with incentives for these individuals to open bank accounts. As remittance transfer services through FIs become more customized, affordable, and accessible, and remittance clients become more willing to use them, the potential to link these services with other financial products grows significantly. At the same time, the ability to leverage these formal remittance flows for development ends is greatly enhanced. The following sections delve into these possibilities:

SAVINGS ACCOUNTS

Owning a savings account is the first step toward what many authors and institutions term i.e. ‘financial democracy.’ Developing practical saving plan encourages migrants to use remittances towards productive purposes that contribute to development. FIs must focus on designing mechanisms through which remittance clients can save in a formal system linked with remittances and development-enhancing products. Remittances saved formally are an important component of investment financing.

Converting remittance clients into banked “individuals with savings accounts and other financial products” is crucial to leveraging remittances for development. Benefits of formal savings plans include a more secure mechanism for saving, interest-earning potential, increased collateral for loans, development of a credit history, and an established relationship with FIs. Banks are much more willing to extend credit to clients with whom they have had a long-term professional relationship. This credit can then be directed toward productive rather than consumptive purposes. For example, migrants have expressed interest in channeling the 30 percent of remittance money not spent on consumption into transnational housing loans, micro-business investment, educational expenses, savings, and health/life/repatriation insurance. The ability of migrants to leverage loans for these purposes, however, depends first on their ability to save a portion of total remittances received – usually in formal banking systems.

The primary methods through which remittance clients are attracted to these types of services are diaspora outreach, community events, hometown associations, advertising, and, most of all, word of mouth. However, progress toward enticing immigrants into the formal banking system has been slow. While many FIs are offering more innovative transfer services, they have been sluggish in developing financial products like savings plans that are attractive to the remittance client demographic, as explained above. FIs that have been successful in developing savings plans for remittance clients, however, have offered incentives and customized their products for this clientele in mind. Savings that are deposited into formal bank accounts can therefore be directed toward asset building loans that advance development objectives, as shown in the following section:

CREDIT

Access to financing is now widely acknowledged as a path to meaningful economic inclusion and reduction in poverty. Policy efforts to increase access to finance in Pakistan have taken time to bear fruit, but now access is indeed expanding quickly in certain financial sectors (microfinance, remittances) albeit from a very low base. Nevertheless, policy measures cannot single-handedly increase financial access; financial institutions’ willingness to expand access in Pakistan has been stinted by slow technologic advances, weak legal foundations, and unsuitable financial processes and products.

Poor socioeconomic conditions, gender bias, and low levels of basic education and financial literacy remain barriers, but perhaps the single strongest driver of low demand for financial access has been income.

Major constraints to financial access, in spite of policy reforms, arise from the high levels of poverty, combined with low awareness of and information about available financial services, as well as gender bias. Technology can be harnessed to help expand geographical outreach, as well as overcome low literacy levels. Physical access can be stepped up using a two-pronged strategy, in view of limited financial infrastructure and penetrationvia existing agencies with higher penetration as well as via new technology solutions such as branchless banking and mobile banking. New approaches suitable for smaller enterprises, such as bank digitization are workable tools to achieve sustainable small and medium enterprise (SME) lending products.

INSURANCE PRODUCTS

Migrant workers commonly use remittances to support their families; after going abroad for more-promising work opportunities, they send some of their earnings home. Families who are dependent on remittances from family members abroad are generally in a position of higher risk, and insurance is well suited to reducing the risk of lower-income families. Bancassurance seeks to bring insurance products to a market segment that cannot afford or access traditional forms of insurance. Presently, there are few insurance products available that are specifically tailored to meet the needs of remittance-dependent families.

OTHER OPPORTUNITIES

Other products that are being tailored to remittance clients include credit cards, pension funds, checking accounts, and home equity funds. While some of these products have development potential, as in the use of credit cards and checking accounts to facilitate the purchase of productive collateral in small enterprises, others may have limited direct links with development. There is growing remittance potential in investments where impacts could be multiplied – insurance, mortgages, private education, banking and finance (microfinance and rural credit). Regardless, all comprise part of a variety of products that should be made available by FIs to remittance clients as part of a holistic basket of services that foresee the needs of remittance clients and attempt to harness the growing remittance market.

Other initiatives which can facilitate the spread of remittance-based finance include: financial literacy targeted at remittance-receivers, who can be accessed via remittance-receiving FIs and can be educated on the risks of dependency on remittances and alternative solutions to avoid it and use remittances productively; marketing campaigns which target specifically remittance receivers, such as the ones already existing which market remittance transfers; technological innovation, that, as mentioned above, can speed up and improve the efficiency of markets for remittance-related products, such as mobile payments.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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